In essence the underwriting process is nothing more than a business game of risk-to-premium trading – where clients trade with the insurers to have their risk of a loss transferred to the latter with the latter getting a premium in return.
This trading process is heavily dependent on ability and capability of the clients – if the clients are more capable or have an upper hand (ie. engaging expert intermediaries like a trained agent or an insurance broker) in this trading process, the deals governing those risk-transfers would most likely end in favour of the clients, otherwise insurers would have the upper hand.
However, trading environment could cause a downside for this risks transferring mechanism if on a per risk basis or with a particular portfolio having suffered a higher than normal or deteriorating loss ratio for the insurers. The result of this is the hardening of rates or clients having had to pay a higher premium than the previous year. On the contrary, rates may decline or softened over time if insurers were still able to earn their underwriting margin or perhaps, investment climate is still conducive for positive gains.
Sometimes rates may even continue to be on a prolonged downtrend despite persistent portfolio losses. Events like prolonged soft markets and intense competition occurring at the same time somehow were sidetracked for fear of losing market shares. In the Malaysian markets perhaps, the Hull, Commercial Motor and Motorcycle portfolios depict such a market scenario. But why do insurers continue to underwrite such risks when these were already proven to be bad for business? Perhaps investment was the main driver – insurers can make money sense of their investment books over those losses underwriting brought within. Or was it about having had to show case the TOPLINE premium revenue today and think about the underwriting results tomorrow?
Was it because the TOPLINE was so paramount important in a market much devoid of good quality risks? But for any risks to qualify as being good quality or otherwise, that would very much depend on the adequacy of premium charged in respect of the relevant portfolio! This may also depends on how that particular risk could be further improved or not…..
We can just go on and on describing how risks should be underwritten and the needs of charging the correct level of rate and so on….. BUT, this can never be the case in real life! The practicalities of it all would require this thing called BALANCING…… or creating something of an equilibrium or something as between the YINs and the YANGs.
Let’s say, we can continue talking about it but somehow we can never get that balancing act – thus our western counterparts called it living off the UNDERWRITING CYCLE…. – you just have to be on the right side of the cycle otherwise, you can be drown in the seas of losses, which can come either as a killer blow or killing you softly with a song, something like those IBNRs as they were being impregnated into the Motor Act portfolio…
But as far as the insurers are still within the positive sides of the Underwriting Cycle, insurers would just have to try and try… tried they did to make some profits that may be elusive, ultimately. Perhaps we start off with some wagering on top of the usual trading stuff.
WAGERING simply means we have limited risk information, or rather too little for the size of the risks that are being underwritten. It is such, you just take a small dosage of the risks – well small dosage wouldn’t hurt the pocket, right?
Well! We did make some money last year…. why not try to increase our wager? That would graduate us into the category of a BETTER, or was it the right word to use for a person who at times place a bet? Rightly, wrongly… betting simply means we are increasing the stake…. and of course, we are also increasing the risks of a larger loss. Larger dose of a likely losses somewhere around the corner!
And NOW…. now I think we got the correct theory! We bet last year and the results have been good! Which, also goes to show we are a good better with the instinct towards placing a good profitable bet. The bigger we bet, it is going to be a fact we could acquire a larger than life dosage of risk spreading and therefore, a higher premium base for the insurer. This can’t be wrong! Let’s take the GAMBLING approach – we can rake in a fast-forward premium revenue growth, just in time for some great bonus for Christmas and Chinese New Year, which perhaps could last us till Hari Raya and Deepavali!
Are we already into the “All-in-One” Underwriting approach? Trading was okay…. wagering, betting and gambling have been getting us thus far! They can’t be wrong.